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German year-ahead coal margins hit record low

London — German year-ahead coal-fired power generation margins have dropped to new record lows as EUA carbon allowances jumped to a two-year high last week, increasing market pressure on older coal plants to close just as political pressure eased amid the ongoing talks to form a government, which saw forward power prices fall.

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German coal vs gas generation margins for year-ahead

S&P Global Platts data shows the German year-ahead clean dark spread (CDS) for a 35% efficient old coal unit fall to minus Eur1.78/MWh, while the CDS (45% efficiency) for modern coal plants shed over Eur2/MWh since mid-December to Eur4.55/MWh.

Key reason for the sharp decline for coal plant profitability is the surprise rally in EUA carbon allowances, up by over 10% last week to an intra-day high of Eur8.85/mt Friday, the highest level since 2015.

Gas-fired power generation margins were less impacted with gas plants less carbon intensive than coal, but with clean spark spreads even for modern gas unit remaining below coal spreads, the data shows.

Background to the general decline in generation margins this January is also the drop in outright power prices most strongly felt on the far end of the German power curve, with especially Cal 20 and Cal 21 contracts losing their premium from possible coal plant closures by 2020 after news emerged that Germany 's potential "grand coalition" would put less focus on the 2020 emissions cutting target.

Instead, the possible coalition parties agreed to boost wind and solar with an additional 8 GW to be tendered by 2020 to close the gap to the 2020 target as much as possible, but adding to an already oversupplied market.

Progress on the coalition talks is pending the green light from SPD party members in a January 21 vote with the SPD's current acting environment minister in an interview this week again hinting at the possibility of carbon pricing measures should official coalition talks get the green light.

The long-term trend of rising gas-fired margins and falling coal margins remains intact with further possible gains for EUA carbon allowances set to increase market pressure for the oldest coal plants to close.

Output from German hard-coal fired power plants fell 16% in 2017, mainly due to coal plant closures on the back of worsening generation margins. Carbon market analysts this week also increased their forecasts for EUAs.

-- Andreas Franke, andreas.franke@spglobal.com